The Timor Gap Treaty (the Treaty) was signed on December 11 1989 by the Commonwealth of Australia and the Republic of Indonesia represented by their respective Ministers of Foreign Affairs, Gareth Evans and Ali Alatas. The Treaty came into force on February 9 1991.

The Treaty covers the joint exploration of petroleum resources in an area of the Timor Sea which straddles between what is now the independent state of East Timor (then regarded by Indonesia and legally accepted by Australia as the Indonesian Province of East Timor) and northern Australia.

For historical reasons a seabed boundary in this area between the two states had not been capable of resolution and this fact was a potential hindrance in relation to the exploitation of resources within the seabed area. However the Treaty contains Article 2(3) (effective at international law) which allows both countries to jointly exploit the oil resources of the area without prejudicing their long term rights to negotiate a permanent boundary at some point in the future (Triggs 2004:334).

The Treaty also creates a Zone of Cooperation (ZOC) which contains three zones - areas A, B and C. Area C is that lying closest to East Timor, Area B is that lying closest to Australia and Area A lies between Areas C and B. Exploitation of resources by the two states differs in each area, with Indonesia having control of resources in Area C, Australia controlling Area B, and Indonesia and Australia jointly controlling, by way of a Joint Authority, resources in Area A (Article 2).

The Treaty states it is to remain in force for forty years from February 9 1991, and unless otherwise agreed, for a further successive terms of twenty years, unless by the end of each term, including the initial term of forty years, an agreement is made as to a permanent seabed boundary between the two states. However, the Treaty no longer had any effect once a new Timor Sea Treaty took effect between the government of Australia and the government of East Timor in April 2003.

Detailed Information:

1. Part II of the Treaty covers 'Exploration and Exploitation in the Zone of Cooperation' as follows:

1.1 Area A. In relation to the exploration for and exploitation of petroleum resources in jointly controlled Area A, the rights and responsibilities of both Indonesia and Australia are exercised by a Ministerial Council and a Joint Authority. Petroleum operations are carried out by way of production sharing contracts (Article 3(1)) entered into between the Joint Authority and 'limited liability corporations specifically established for the sole purpose of the contract' (Article 3(2)). All benefits of exploitation are to be shared equally between Indonesia and Australia (Triggs, 2004:335).

1.2. Area B. In relation to the exploration for and exploitation of petroleum resources in Area B, under Australian control, Australia is obliged to give information to Indonesia in relation to exploration permits, retention leases and production licences in that Area. Australia pays to Indonesia ten per cent (10%) of gross Resource Rent Tax collected from corporations producing petroleum in Area B.

1.3. Area C. In relation to the exploration for and exploitation of petroleum resources in Area C, under Indonesian control, Indonesia is obliged to give Australia similar information in relation to petroleum operations in Area C and to pay to Australia ten per cent (10%) of the Contractors' Income Tax collected by Indonesia from corporations producing petroleum in Area C.

2. Part III of the Treaty covers the establishment of a Ministerial Council.

2.1 The Ministerial Council (Council) has 'overall responsibility for all matters relating to the exploration for and exploitation of the petroleum resources in Area A......and such other functions relating to the exploration for and exploitation of petroleum resources' as may be entrusted to it by Indonesia and Australia (Article 6(1)). The Council gives direction to the Joint Authority.

2.2 The Council consists of an equal number of Ministers designated by Indonesia and Australia who meet annually or as often as may be required.

3. Part IV of the Treaty covers the establishment of the Joint Authority

3.1 The Joint Authority is a legal body and has legal capacity to carry out its functions under the laws of both Indonesia and Australia.

3.2 The Joint Authority is responsible to the Council and subject to the directions of the Council and is responsible for 'the management of activities relating to exploration for and exploitation of the petroleum resources in Area A...' (Article 8). In particular it has the capacity to enter into production sharing contracts with corporations (Article 8(b)) who are given the exclusive right to undertake petroleum operations in a contract area (Annex B, Part III, Article 4(1)). A Model Production Sharing Contract is included as part of the Treaty at Annex C.

4. Part V of the Treaty covers the cooperation between Indonesia and Australia on a number of matters in relation to Area A, including:

Surveillance activities

Security measures

Search and rescue

Air traffic services

Hydrographic and seismic surveys

Marine scientific research

Protection of marine environment

Liability of contractors for pollution of the marine environment

Unitization between Area A and areas outside Area A, and

Construction of facilities.

5. Other parts of the Treaty cover further issues such as

Applicable laws in relation to production sharing contracts, customs, migration and quarantine

Employment which gives precedence to employment of nationals from Indonesia and Australia

Health and Safety for workers

Criminal jurisdiction

Application of taxation law

Settlement of disputes

Amendment of the Treaty, and

Rights of contractors.

6. Production Sharing Contract

Contracts are usually made for a period of 30 years and incur the following contract service fees to be paid by the contractor to the Joint Authority:

At the beginning of each contract year, a service fee of US$125,000

If the contract is terminated within the first 6 years of the term of the contract, an amount of US$750,000, less any contract service fee previously paid, must be paid to the Joint Authority

Further payments are made at the beginning of each contract year if resources are discovered in a particular area: US$40,000 for the first discovery area and US$20,000 for each additional discovery area

An additional fee of US$20,000 is paid at the beginning of the contract year if production structures are installed.

Outcomes:

Revenue from Zone A of the Zone of Cooperation first became available in July 1998 (Triggs 2004:335).